Selling off Losing Investments (Year End Tax Tips)
There's several reasons why I'm putting this at the top of my list of things to review, both for myself and for my clients. Not the least is that the financial markets have been tumultuous this year. And now may be a good time to take a hard look at your investments. "Are you satisfied with their performance compared to the rest of the market?," is a crucial question, according to Jeremy Vohwinkle (About Financial Planning, How To Do An Annual Financial Checkup). You may also want to adjust your investment strategies, and here I'd recommend reviewing the Eight Secrets to Improving Your Portfolio Returns from Joshua Kennon (About Investing for Beginners).
If you are going to re-design your investment portfolio, that may involve selling losing stocks or funds. There some tips to remember when it comes to capital losses. Keeping these in mind can help you reduce taxes this year and next.
- Capital losses offset capital gains in the year that the investments are sold off. If your losses exceed your profits, then the net loss is tax deductible but only up to $3,000 in net losses for the year.
- The remainder of the losses carries over to the subsequent year as a capital loss carryforward.
- Losses may be deferred under the wash sale rule if you repurchase the same investment within one month of selling.
However, it might be just as beneficial to defer selling any profitable investments until the following year. That way, the capital losses will be partly deductible this year (up to $3,000) and the rest will offset next year's gains. You can
Investors should be careful when timing the sale of any losing positions. Any purchase of "substantially identical stock or securities" (from Publication 550) within 30 days of selling a security at a loss will be deferred. The workout is to selling one investment at a loss, and purchase a similar (but not "substantially identical") investment. For example, you could sell shares in one mutual fund, and then purchase shares in a different fund. As long as they aren't identical, you'll be able to recognize losses while still staying invested in the market.
More resources:
- Capital gains and losses
- Dealing with Capital Losses (Investing for Beginners)
- Claiming a Loss for Worthless Securities (Fairmark.com)
Comments
is there a way to benefit from the losses occurred in my 401k or IRA accounts, by selling/withdrawing?
Losses in an IRA are handled differently, but basically there is a way to get IRA losses on to your tax return.
Herve, yes you can possibly take a deduction for losses in an IRA. The math works best with Roth IRAs. This won’t work for tax-deductible traditional IRAs or for 401(k) plans, as those amounts would not have any taxable basis, and so would not produce a loss for tax purposes. Further, there are restrictions on withdrawing funds from a 401(k) that further prevent any loss treatment possibilities. So I’d focus primarily on losses in a Roth IRA, and secondarily on losses in a traditional IRA.